The superannuation contributions caps have been a bone of contention ever since the government began to lower them to what many industry experts consider inadequate levels.
The smaller contribution limits have resulted in a significant number of breaches, with self-managed superannuation fund (SMSF) trustees and members hardest hit.
The breaches in the main have not been deliberate, so by nature have not been attempts to somehow rort the system to get an unfair boost to members’ retirement savings.
But this fact was largely ignored by the government when it was formulating the penalty regime to deal with these breaches.
Basically, legislators implemented a penalty regime so severe that in some circumstances individuals were being hit with an excess contributions tax (ECT) bill calculated at 93 per cent of the breach amount.
This was due to the fact a penalty tax rate of 46.5 per cent was levied on cap breaches.
In a small admission of how excessive the ECT penalties were, the government softened its stance just over a year ago by allowing individuals a one-off opportunity to withdraw breach amounts up to $10,000.
However last month saw some proper common sense applied to the situation after years of lobbying and objections by industry bodies and participants alike regarding the unjust nature of the system.
From 1 July 2013, breaches of the concessional superannuation contributions caps will now be taxed at the marginal tax rate applicable to the individual.
This signals a definite shift in the philosophy of the legislators as they are now only looking to collect the tax that would have otherwise been remitted had the money not been contributed to a superannuation fund. The punishment factor has been eliminated.
Furthermore individuals now have the ability to withdraw the excess contribution amounts from their funds if they see fit and not just on a once only basis.
To be expected the government has not ignored the time value of money in the scheme of things. To this end it is charging an interest component of around five per cent to the tax liability to compensate for the time the individual had the funds sitting in super.
However this penalty interest charge will be levied for the whole financial year, which is not entirely a correct assumption seeing the bulk of contributions are anecdotally made, especially for SMSFs, toward the end of the year.
That said the changes should come as a massive relief for SMSF members knowing they will no longer be unduly punished for inadvertent breaches of the concessional contributions caps.
Furthermore it may actually give people a more positive attitude toward superannuation and have them revisit their contributions strategies to consider the use of items like reserves, to optimise the timing of their contributions.
All in all a fairer outcome for all superannuation members but particularly those with SMSFs.
Darin Tyson-Chan is the 2012 SPAA Trade Media Journalist of the Year. He is the editor of self managed super, a new publication dedicated to the SMSF practitioner. If you would like a free year’s subscription to the magazine and its associated e-newsletter valued at $100 send your details to info@bmarkmedia.com.au
